The Korea Economic Research Institute (KERI) under the Federation of Korean Industries (FKI) has expressed opposition to the government’s plan to revise the Enforcement Decree of the Financial Investment Services and Capital Market Act to allow public pension funds, including the National Pension Service (NPS), to expand participation in corporate management. This is because if the NPS, which is controlled by the government, exerts influence on corporate matters, such as personnel management, articles of association and dividend payouts, it can increase uncertainties for corporations.
KERI announced on Oct. 3 that it has submitted its views to the Financial Services Commission (FSC). The revised enforcement decree has been published for public comments.
The revision of the enforcement decree is designed to expand public pension funds’ participation in corporate management. It will ease the so-called 5 percent rule. It will also allow public pension funds to suspend directors from their duties or demand their dismissal, make changes in the articles of association of the companies that receive investment to improve their governance structure, and involve in activities related to dividend payment. These activities have thus far been prohibited for them.
The proposed enforce decree also allows public pension funds to report their management participation activities to the FSC or the Korea Exchange (KRX) only once a month instead of within five days.
KERI pointed out that the amendment can expand the government’s intervention in corporate management. It said the NPS has the governance structure that is not free from the government’s control.
It also added the revised enforcement decree is problematic when seen from the perspective of the legal system. Under the Capital Market Act, which is a higher law, appointment and dismissal of directors and suspension from their duties are considered an act that affects management rights. However, the new enforcement decree categorizes public pension funds into retail investors and regard these acts as an act that does not impact on management rights.
KERI also claimed that the exclusion of activities related to dividend payment from management rights ignores the reality of business environment. It said changes in dividend policy are considered an important change in the United States and Japan.
In addition, it pointed out that the NPS can frequently change the rule for management intervention. Under the revised enforcement decree, the NPS can make changes in the articles of association of companies to improve their corporate governance according to the principle announced in advance and this is not regarded as participation of management. It means that the NPS can change the principle as long as it discloses it in advance.
The 5 percent rule requires an investor in a listed company to report the purposes of their investment within five days when they acquire more than 5 percent in it or when their stock ownership changes by more than 1 percent. Currently, an investor is freed from a strict reporting rule if the purpose of their investment is not to exercise management control. The problem with the current rule is that “not to exercise management control” is not clearly defined.